Bill Jamieson: Hissing Sid rattles the eurozone

20:22Wednesday 10 August 2011

Economist Ottmar Issing has fired an excoriating attack on the course European history is taking

ALL around, a spectacular darkness abounds. England has joined a lengthening list of countries where riots and civil disturbance have erupted on the streets. This, together with shocking turbulence in financial markets and the sense that sovereign debt is now too big for governments to control, make for an explosive combination. It is one that presages huge political change. We may hope this will be for the better. But with present order out of solutions, the odds are not good.

It is in continental Europe where a major storm is breaking. Amid the successive crises of the past 18 months, each deeper than the last, the clamour has arisen for a centralised fiscal union – economic government from the centre – so the eurozone can break out of this crisis cycle.

In recent weeks this pressure has intensified. Unprecedented solutions have been seized upon to calm the latest flash-point – the fear that Italy was on course for default unless the ballooning interest rate on its sovereign debt was brought down. After frantic meetings and telephone calls, the European Central Bank emerged as a massive – and evidently reluctant – buyer of Italian bonds.

A dramatic enlargement of the eurozone's bail-out kitty – the European Financial Stability Fund – is now widely proposed. And a growing number of observers are convinced that fiscal union is now unavoidable.

In an extraordinary declaration on Tuesday, Jean Claude Trichet, governor of the European Central Bank, described the intervention to buy Italian bonds as "the worst crisis since the Second World War, and it might have been the worst since the First World War if those in charge had not taken very robust decisions".

To crystallise this "one-for-all-all-for-one" single currency zone, a quantum leap towards full political union is at hand. The elite is baying for it – but with one potent and notable exception: "Hissing Sid".

Hissing Sid has had quite an influence on Britain's island story. This was the unflattering nickname that former chancellor Norman Lamont's Treasury officials give to the man who catalysed the most humiliating moments in British recent economic history: our expulsion from the European Exchange Rate Mechanism.

Hissing Sid – or Ottmar Issing, former chief economist of the German Bundesbank and ECB board member – has fired an excoriating attack this week on the course that European history is now taking.

Firmly in the camp of those who believe that monetary union cannot survive without political union, you might think he would be cheered by the rescue measures to support Greece as a big step in the direction of political union. In fact, he declares, the opposite is true.

He makes a point at once startlingly obvious but one that has been almost completely ignored by the eurozone elite: that the concept of political union should be based on a constitution and a political structure enabling voters to have some say. Without this, there is no democratic ratification or legitimacy.

What is happening now is presenting Europe with two dangers: not just a political construct devoid of democratic principles, but one, says Issing, which would put Europe's finances "on a slippery road to a regime of fiscal indiscipline drowning hitherto solid countries in the morass of over-indebtedness".

The future to which Europe is headed is not a democratically agreed union in any sense, but a dramatic shotgun marriage in which membership of the single currency can be assured at any price – a regime, he says, which "causes moral hazard and creates an obvious potential for blackmail".

The recent extension of the powers of EFSF and shared fiscal liability is a big step towards a common European bond. This is being done to immediately lower interest rates for highly indebted countries.

However, he warns, it will also lead to higher interest rates for those countries which enjoyed credibility with financial markets in the past. "Those who claim the effect would be small succumb either to an illusion or deliberately underestimate this risk… A common bond would also immediately relieve some countries of their burden of a record of fiscal irresponsibility: a stronger case of free riding can hardly be imagined. Lack of fiscal discipline is rewarded while fiscal solidity is punished."

The implied transfer of taxpayers' money would also take place without the involvement of national parliaments – "a clear violation", he adds, "of the principle of 'no taxation without representation'".

Almost all treaties promising European fiscal discipline have, he reminds us, been broken time and again. "Violations of fundamental treaties have become a regular event". And the idea that a new European process to transfer taxpayers' money that is neither democratic nor governed by principles that support fiscal solidity would move in the direction of political union is totally misleading. This type of union, he concludes, "would not survive. Its collapse would be brought by resistance from the people".

That resistance, amid an increasingly authoritarian creep by the same insouciant elite that has brought Europe to its knees, is not yet evident. But Issing is an influential voice and his views are widely shared, throughout Germany and among northern eurozone members.

A foretaste of what the "new Europe" might mean for member governments was given by Italy's president, Silvio Berlusconi, earlier this week over a leaked letter showing that the ECB had dictated the exact details of Rome's new austerity policies as a condition for ECB bond purchases.

"They've made us look like an occupied government," he declared. "They bought the bonds to save themselves, not Italy."

Issing, who firmly believes that monetary stability and low inflation should be the ECB's paramount concerns, is no champion of the central bank becoming the de facto economic stimulator of the eurozone. That responsibility should lie in the political realm through an enlarged EFSF.

But there are doubts whether there is sufficient political understanding across governments of how big it would have to be to give it credibility in the markets.

Professor Volker Grossman, of Fribourg University, fears the crisis will be resolved through higher inflation – a course "that will hurt everybody and raise borrowing costs for Germany".

That, given Germany's history, would be anathema. But that this may be seen as the least worst choice gives an indication of the new darkness we have entered.

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